Cullen Roche of the Pragmatic Capitalism blog has noted that New York Stock Exchange margin debt, which is used to leverage up bets on stocks, is near all-time highs.
“It’s rather alarming to see NYSE margin debt just shy of its all-time high as of the March reading,” wrote Roche. “My guess is we’ve actually already surpassed the all-time high though we won’t officially know until April data is released.”
Bank of America Merrill Lynch’s Stephen Suttmeier is also picking up on this in his latest note to clients. He believes this is sending a contrarian bearish signal:
Leverage can be used as a sentiment indicator because it is related to investor confidence. Current levels for both Net Free Credits and Margin Debt indicate bullish sentiment in the equity market. Although it should not be used as a market timing tool, the implication is contrarian bearish. Leverage, as measured by NYSE Margin Debt, rose 28.3% year-on-year to $380bn in March, slightly below the July 2007 peak of $381bn. Peaks in NYSE margin debt preceded peaks in the S&P 500 in both 2007 and 2000 – no peak in margin debt yet.